The UK should not rule out joining in a European banking union as it could be a means to promote and protect the interests of Britain's financial institutions, peers have said.

The Lords European Union Committee said the plans for genuine economic and monetary union as a way of addressing the problems in the eurozone could have "immense" implications for the UK and the City.

The peers warned that the EU institutions should ensure that the concerns of the UK and other member states outside the eurozone about closer integration should not be "lightly dismissed".

The cross-party group's report questioned how effective and practical the EU's agenda would be, but stressed that progress on a banking union was "vital" for the eurozone.

"Much of the 'genuine economic and monetary union' agenda is a distant prospect and some of the proposals were never realistic," the report said.

"Nevertheless, the eurozone remains on the road towards greater integration. The implications of this for the UK are immense. A strong and prosperous eurozone is in the interests of all EU members, as is a strong and engaged UK (and a strong City of London).

"Achieving all three outcomes simultaneously will require close care and attention, together with goodwill on all sides."

The report said it was a "moot point" whether it would be in the UK's interests to join a banking union with the eurozone countries and other member states.

But it added: "The Government may be ill-advised to assert that banking union is the sole province of the single currency for all time.

"It would be wise not to close the door on the possibility of some level of participation in banking union in the future, in particular as a means of further promoting and shaping the single market in financial Services and the UK's position within it."

The committee said the current proposals for a single resolution mechanism to bail out troubled banks were "suboptimal".

"The process to resolve failing is too complex and the funding resources available are inadequate, leaving individual member states largely responsible," the peers said.

"There is no prospect of agreement on a common deposit insurance scheme. Confidence in the banking system will only fully be resorted when the vicious circle linking bank and sovereign debt is broken."

The peers questioned the Government's assertion that the UK's standing in Europe had not been diminished as a result of closer ties between the eurozone countries and "the nature of the UK's engagement with its EU colleagues".

" The Government stress that the UK's influence has not diminished and that it continues to play an integral role in the EU, notwithstanding the fact that eurozone members are pursuing an increasingly integrationist agenda.

"The evidence we have heard, in particular in Brussels and Berlin, tends to contradict this assertion. This diminished influence appears to have two root causes: first, the UK's decision not to participate in economic and monetary union (EMU); and secondly, the nature of the UK's engagement with its EU colleagues.

"The UK's non-participation in EMU inevitably has meant that it has had only a limited influence on some of the decisions which will shape the future of the eurozone as well as the EU as a whole.

"This is particularly important because the eurozone crisis has dominated the EU's agenda in recent years, and is likely to continue to do so in the period ahead. The UK's decision not to participate in genuine economic and monetary union, while understandable, could reinforce these trends."